Thursday, December 07, 2006

Let's Play the One Hundred Friends Game

This game takes general income and wealth statistics and converts them into the number of friends out of one hundred that would match each statistical group. Stuff like this:

The richest 1% of adults in the world own 40% of the planet's wealth, according to the largest study yet of wealth distribution. The report also finds that those in financial services and the internet sectors predominate among the super rich.

Ok. So one of the 100 friends gets 40 chocolate cakes, the other 60 chocolate cakes have to feed the other 99. What next? Perhaps this:

The bottom half of the population owned merely 1.1 percent of the globe's wealth. The net worth of the world's typical person — whose wealth was above that of half the world's population and below that of the other half —was under $2,200.

The widening gap between the global haves and the have-nots in large measure reflects the failure of less- developed countries to develop, while rich countries — particularly the United States — have experienced fast economic growth and a spectacular buildup of assets.

"Developed countries have pulled ahead of the rest of the world," said Edward N. Wolff, a professor of economics at New York University who is a co-author of the new study. "With the notable exception of China and India, the third world has drifted behind."

We have to rearrange the 60 cakes we gave the 99 friends. We have to take ONE chocolate cake and give it to 50 of those friends, while ONE friend gets 40 cakes and the remaining 59 cakes will be divided in varying proportions among the remaining 49 friends. This is how the world wealth distribution looks.

And what about Americans? Well, five of those 100 friends are Americans and those five get to eat 33 chocolate cakes.

Wealth is not the same as chocolate cakes, of course. Wealth is not the same as income, either. Wealth is like your bathroom sink with water in it. Income is the water that runs into the sink from the tap, and your expenses are the water running out through the hole at the bottom of the sink. Inheritances and such are like someone dumping a pailful of water into the sink whenever you get one.

This United Nations study on world wealth and its distribution is the first large study of its kind and it suffers from some obvious problems. For instance, it's hard to measure wealth and many countries don't keep good statistics on it. The valuing of wealth across countries is also tricky, because different countries have different pricing levels and it's a little easier to live on low incomes in low-income countries. But the inequalities are still very severe, even if we adjust the prices used to reflect this:

Worldwide wealth comparisons become somewhat less skewed when they use so-called purchasing power parities — the exchange rates at which products like a quart of milk or a TV set would cost the same thing everywhere. They correct distortions resulting from, for instance, the undervaluing of the Chinese yuan, and reflect more accurately the purchasing power of typical consumers in different countries.

Using this method, the United States still comes out on top but with a smaller share — about a quarter of the world's wealth. And China's share jumps to about 8.8 percent.

That's still like five chocolate cakes per American, on average. Note, though, that wealth is also unequally distributed within the United States, and here is where my game analog breaks down.

What does the very unequal distribution of world wealth mean? Other than rising anger from the poor as more and more of them get televisions in their villages and learn about how wealth is distributed? The answer varies depending on whom you ask. Here is a selection of opinions:

"These levels of inequality are grotesque," said Duncan Green, head of research at Oxfam. "It is impossible to justify such vast wealth when 800 million people go to bed hungry every night. The good news is that redistribution would only have to be relatively small. Such are the vast assets of the rich that giving up a small part of their wealth could transform the lives of millions."

Madsen Pirie, director of the Adam Smith Institute, a free-market thinktank, disagreed that distribution of global wealth was unfair. He said: "The implicit assumption behind this is that there is a supply of wealth in the world and some people have too much of that supply. In fact wealth is a dynamic, it is constantly created. We should not be asking who in the past has created wealth and how can we get it off them." He said that instead the question should be how more and more people could create wealth.

Ruth Lea, director of the Centre for Policy Studies, a thinkthank set up by Margaret Thatcher, said that although she supported the goal of making poverty history she did not think increasing aid to poorer countries was the answer. "It's no use throwing lots of aid at countries that are basically dysfunctional," she said.

Sigh.

Wealth may be in some ways more important to own in the poor countries, because the governments themselves are poorer and lack the ability to provide pensions or health care or other programs which serve as insurance against calamitous life events. A poor person in a wealthy country has at least some access to these social insurance programs. Perhaps we should start by making the poor countries themselves wealthier?

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